Investing abroad risky but expected to grow

Investors nervous about the U.S. economy are casting their eyes overseas.

Emerging markets especially capture their attention. These carry higher risk, but returns have been dramatic.

Emerging-markets stock funds turned in an average gain of 36 percent last year, according to Lipper Inc., with a three-year annualized return of 33 percent. China, the Pacific (excluding Japan) and Latin America were stellar regions in a year that rewarded the daring.

Some experts expect the momentum to continue, though it will be tough to match the recent results.

"We're going to maintain a heavier weighting than usual in the emerging markets in 2008, with a 22 to 27 percent exposure in them," said Lynette Schroeder, lead manager for $855 million Driehaus International Discovery Fund (DRIDX), which includes developed and emerging foreign markets. "The primary drivers for emerging markets have been commodities, domestic demand and overall growth in their economies."

Chicago-based Driehaus International Discovery gained 29 percent in 2007 and has a three-year annualized return of 30 percent. This "no-load" (no sales charge) fund requires a $10,000 minimum initial investment and has an annual expense ratio of 1.68 percent.

"The really big question is whether domestic growth in countries such as China will be able to offset any slowdown the U.S. sees, and we don't know the answer to that yet," said Schroeder, who said her volatile fund should represent the riskier portion of an individual's portfolio.

Nearly half of Driehaus International Discovery's holdings are in the United Kingdom and Western Europe, with another one-fourth in Asia, excluding Japan. The remainder is mostly in North America, Japan and Latin America. Even though developed markets move more slowly, Schroeder is able to find companies within them that feature strong earnings growth.

The fund's largest holdings are diverse: shipbuilder Cosco Corp. of Singapore, Nintendo of Japan, Rogers Communications Inc. of Canada, mineral processor Outotec of Finland and Millicom International Cellular of Luxembourg.

"We advise investors to consider dollar-cost averaging for their international investing in 2008," Schroeder said. "For example, they could put $2,000 into our fund in January and wait until mid-February to put in more, since I think markets are going to be volatile and you'll get a better overall return that way."

The move to emerging markets would have been even more rewarding if you'd moved sooner.